In Ethereum you don't have coins that get associated with an address, the balance of that address increases so in a way that mixes the "coins" with the rest of the "coins" for that address and so the receiver can't put them aside.

Put another way: in Bitcoin you can refuse accepting coins by ignoring them. In Ethereum you can't refuse the funds that someone sends you.

So now that you have funds from a sanctioned entity in your wallet what do you do? One solution would be to send an equal amount to a burn address to show that you never wanted these but it has two problems: it requires one to actively monitor the wallet and know what incoming funds are from some sanctioned entity AND requires you to spend money on a transaction you never wanted to do in the first place. And what if it's a cold wallet. It's a really messy situation.

Also if you wanted couldn’t you create a transaction that burns an amount equal to the tainted coins, that includes a message stating your intention?

This seems like a non issue to me.

You could do a transaction but I described the problem with that in the previous comment (edited before I saw your edit)

It's like the difference between someone telling you the password to some bank account filled with drug money and someone sending you a wire transfer to your bank account plus the bank not being able to prevent it. In the first case you can just forget the password and not touch that account. In the second case suddenly it's on you to know what incoming funds were bad and distance yourself from them (sending back or burning).

In the ethereum blockchain each transaction includes the originating address, the destination address, and the amount.

Both blockchains have all the information you need to avoid spending tainted coins, and it would depend on the wallet implementation to do that for you.

There are plenty of bitcoin wallets that just present the total coins present in an address and it's on the user to look at the lower layers or use a wallet that does that for you.

This whole thing seems like a distinction without a difference.

Hopefully a judge would see it that way as well, until it's tested in court we'll never know.

In the simplest case there are coins that get marked as being spendable by some public key (address). That's the analogy with the password to a bank account was refering to. As long as you don't make use of that privilege then you can't be reasonably criminally convicted. That doesn't mean law enforcement wont come and ask questions.

In Ethereum it is more like you said where a certain amount is actually credited to an address and at that point cannot be distinguished from other funds in that address.

I agree both systems have enough information to handle the situation but again (I start to feel like a broken record) - there is a clear difference between them in that one needs active work to distance yourself from the funds while the other just requires not touching the tainted coins. You could also in Bitcoin go the extra step and actively burn those coins. Ideally the sanctioning body would provide an address of theirs where tainted coins can be sent and the sender then reimbursed for the fees or even awarded a small amount.

Hopefully a judge would see when someone innocent received tainted funds but it would be a tad more difficult on Ethereum than on Bitcoin.

I tried to search for this before my last post but I just got a bunch of trash results, SEO spam and articles aimed at non technical people.

And in a Mimblewimble blockchain, you can stop someone from sending you coins in the first place, since the receiver needs to sign along with the sender (elaborated on in my other comment).

Then an OFAC-sanctioned individual adds another hundred dollar bill to the stack, to make 1001 hundred dollar bills.

Are you saying if I spend 1000 of those, and leave one hundred dollar bill unspent, but the unspent bill is a different piece of paper with a different serial number than the one provided by the sanctioned individual, then I've broken the law?

But if I knew the serial number of the specific hundred dollar bill provided by the OFAC-sanctioned individual, and didn't spend that exact piece of paper, but just kept it in my wallet, then somehow that makes all the difference and now I haven't broken the law?

Since currency, Ethereum and Bitcoin are all fungible and mutually interchangeable, what difference does it make?

If it's in your wallet you've broken the law. If it magically appeared on your doorstep and you call the FBI, you should be fine. (You'll be investigated.)

Anyone who ever sent to or received from Tornado any funds should be talking to counsel.

By analogy, there's no practical difference between a balance in an Ethereum address getting dusted with tainted funds, or a Bitcoin address with a tainted UTXO that I don't touch.

Now in Ethereum there are no coins like in Bitcoin and hence you can't taint them. You can taint an address and now if you received funds from a tainted address you get tainted as well. It's infectious and that's the whole idea behind this dusting attack.

Of course law enforcement can use discretion when it's only small amounts of funds but where exactly is the cutoff? What are the exact guidelines when you receive such funds and how do you stay 100% on the right side of the law? And why would a normal user have to care about all of this?

I'm not saying Bitcoin is a lot better than Ethereum in this regard. It's not a great situation in both chains and there will need to be better tools, laws and guidelines to handle these as time goes by.

(Custodial wallets can keep track of bad stuff received since account inception and allow spend of the clean amount only, no fee for on-chain burn required.)

Whole farce is hilarious.

The point is that Bitcoin actually doesn't have addresses/accounts. I think you are modeling this distinction as whether people clump all their money together into a single address/account or use a "wallet" of them (maybe all derived from a single key), but Bitcoin is way more abstract than that: there is no concept of an "address" at the level of Bitcoin itself... that is just a fiction created by an extremely popular way people protect money on Bitcoin. You might also note that Bitcoin tends to talk about different address formats (such as p2pkh), which often come from not merely different ways to serialize the keys but from different ways accounts have been protected with different scripts. In Bitcoin, you can have money that is owned by "anyone who can answer my math riddle" and that's that: unlike in Ethereum, it isn't that the money is owned by an account with an address which has code to restrict access, but the money is a little pile and the most universal "address" you can talk about is the script itself.